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Patterns of Foreign Exchange Intervention under Inflation Targeting
Author:
Gustavo Adler
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Kyun Suk Changnull

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Zijiao Wangnull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 069
Language:
English
Publication Date:
29 May 2020
DOI:
https://doi.org/10.5089/9781513536453.001
ISBN:
9781513536453
ISSN:
1018-5941
Pages:
29
Keywords:
WP; IT regime; foreign exchange; inflation targeting; foreign exchange intervention; exchange rate; inflation expectation; inflation objective; use of FXI; inflation outcome; FXI proxy; Inflation; Exchange rates; Exchange rate adjustments; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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The paper documents the use of foreign exchange intervention (FXI) across countries and monetary regimes, with special attention to its use under inflation targeting (IT). We find significant differences between advanced and emerging market economies, with the former group conducting FXI limitedly and broadly symmetrically, while the use of this policy instrument in emerging market countries is pervasive and mostly asymmetric (biased towards purchasing foreign currency, even after taking into account precautionary motives). Within emerging markets, the use of FXI is common both under IT and non-IT regimes. We find no evidence of FXI being used in response to inflation developments, while there is strong evidence that FXI responds to exchange rates, indicating that IT central banks in EMDEs have dual inflation/exchange rate objectives. We also find a higher propensity to overshoot inflation targets in emerging market economies where FXI is more pervasive.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2020: Issue 069